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Investing in CFDs: Taking Stock of Your Investment Strategy in 2019

January 15, 2019
Tom

You have saved up some money and you are ready to invest.

You have chosen to invest in Contracts for Difference (CFDs). So, you have read the basics and are set to take the plunge. Hold on. Before you take the deep dive and start investing, there are some important questions for which you need to have answers. Do you have a strategy in place and are you prepared for how events are expected to unfold in 2019? It’s easy to be bullish when the markets the world over are rallying and sentiments are upbeat. However, how would you react when the markets start tumbling and everything is moving southward? Will you panic-sell or procrastinate, or continue to smile because you anticipated these developments and invested in CFDs so that your investment strategy allows you to profit in any scenario?

If you belong to the new burgeoning class of investors, you are not alone. There are millions of investors the world over who are jumping on to the bandwagon of forex trading or CFD trading, and with good reason. CFDs have sustained their popularity for over a decade, mainly because they have allowed investors to deal with volatility, one of the perennial concerns of the trade. In fact, the power to overcome volatility is the one single factor that aroused investor interest in CFD trading. It’s now ten years since the Global Financial Crisis when the financial markets tumbled, leading the world into a recession of unprecedented magnitude. Trillions of investor dollars went up in smoke even as the Dow Jones and S&P 500 lost more than half their value. Significantly, ten years later, in October 2018, the US stock markets alone lost $2 trillion and notably, the well-known FANG (Facebook, Amazon, Netflix, Google) stocks were the hardest hit, thus amplifying the risks.

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What will be the main CFD trading strategies for 2019?

The events of 2008 and 2018 were set to reinforce investor faith in CFDs as one of the best trading alternatives in 2019. Market outlook for 2019 seems sanguine, given no expectation of a war, recession or inflation, factors that can typically end an upcycle and bring about a reversal in trends. CFDs allow you to trade across asset classes of equities, indices, forex, commodities, and now even cryptocurrencies.  However, new investors should be wary of the fact that even though the CFD concept applies similarly across asset classes, each asset class works differently. Thus, they should choose an asset class they are familiar with.

As with any form of trading, CFD traders have a number of strategies and methodologies to choose from. Regardless of which asset class you choose to trade, CFDs enable you to leverage and go long and short. Leverage allows investors to magnify their exposure size for the trades without having to commit to the full cost of the trade. However, the risk is that if the market goes against the position taken, the losses the investor will suffer will also be magnified. Some of the prudent risk management strategies to maximise the benefits of leverage would entail being prepared for negative surprises.

Let us assume you have studied the macroeconomic factors. In case you are choosing equity CFDs, to invest, you need to study the fundamental factors that would act as earnings triggers for a company’s stock. Based on your analysis, you may decide whether you want to long or short on a stock.  Hedging could be one of the most important protective strategies investors would want to employ in 2019. Although your analysis shows no dramatic downturns owing to macroeconomic factors, you should not forget that Trump’s Twitter rhetoric on North Korea wiped $1 trillion off the global equity markets in 2017. As recently as in October 2018, Trump’s comments on US interest rates pushed the markets into a frenzy of selling.

So, your strategy should factor in unexpected negative surprises. Thus, if you already have an established open position you can minimise losses by taking an offsetting position. This enables hedging on rising as well as falling markets and gives investors one of the most potent tools to deal with market volatility. CFDs are versatile not only because they allow investors to trade across asset classes but across market conditions, allowing them to determine different strategies for stable as well as volatile markets.

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